HELs: Home Equity Loans

By: EconomyWatch Content   Date: 1 February 2010

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Home equity loans (HELs) are loans issued against the equity in one’s home. These loans allow the conversion of the equity in one’s house into cash by creating a lien against the property concerned. These loans can be used to fund any kind of expenses, such as funding home repairs or college education. These loans can be sanctioned to any person having a good credit record and reasonable loan to value and combined loan to value ratios. Generally second position liens, these loans can also be first position lien or third position liens.

Home Equity Loans: Basic Features

ü      These loans are secured loans and the collateral can be sold off by the creditor in case the borrower is unable to repay the amount.

ü      These loans are granted against the equity in the applicant’s home wherein the equity refers to the difference between the worth of the house and the amount owed on account of mortgage.

ü      These loans are granted for shorter periods than the first mortgages. The general duration of these loans is 15 years, but they can be for as short a period as five years and as long a period as 30 years.

ü      They involve a lump sum amount.

ü      The interest rate is fixed in most cases.

ü      The interest on it can be tax deductible in some cases.

ü      These loans can be used for any purpose. 

 

Home Equity Loan vs Home Equity Line of Credit or HELOC

Although both HEL and HELOC allow the borrower to take a loan of up to 100% of their home equity, they differ in some ways. A home equity loan involves the payment of a lump sum amount mostly at a fixed interest rate. As compared to this, a Home Equity Line of Credit or HELOC is a line of revolving credit in which the interest rate can be adjusted from time to time.

In the case of a HEL, once the loan amount is paid, the borrower cannot borrow any further. However, in the case of a HELOC, the borrower can borrow funds as and when he needs it during the duration of the line of credit. The maximum limit of the borrowing is fixed by the lender. Once the borrower repays some amount of the loan, his credit limit increases by the amount repaid.  


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